Sunday, August 28, 2011

"What is Debt?"

Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

The whole interview is rather fascinating. On the whole, Graeber's argument would appear to strike a blow to capitalism as it has evolved into a modern economic theory. He sharply criticizes the tendency to view all human behavior in terms of exchange. He shows how money evolved from debt, and how debt came from the threat of violence, and how this threat of violence most often came from the State.

How then can capitalism be a necessary condition for a free society, as Milton Friedman so forcefully argued? Well, I think the answer is not to turn to Friedman but rather to Hayek. Many of Graeber's points are good reminders that classical liberals and libertarians can't just construct a society axiomatically from principles such as property rights, without regard for history. But this just leads me back to The Fatal Conceit, which addresses precisely the question of how civilization evolved into the extended order which now holds together by the forces of the market.

While it would certainly be much nicer to think of the "invisible hand" emerging from peaceful developments in human civilization, we need not reject a system merely because of its origins. In fact, that's the whole point of evolution: it may be a grueling process, but what emerges is not the same as what went into the process. For instance, the State may have established money as a way to exercise power over its citizens. However, this is certainly not the only function which money has come to serve. The ability to use existing artifacts for purposes other than those originally intended continues to be a major source of innovation and progress. Under the term "artifacts" we may include both physical objects and abstract artifacts, such as social conventions and morals.

Graeber's point that not all human interaction is exchange is well-taken. Hayek's argument certainly does not rely on this myth. Rather, his argument is that exchange was the vehicle through which interactions with people we don't know could take place. So, for instance, when Graeber says, "Communism is in a way the basis of all social relations – in that if the need is great enough (I’m drowning) or the cost small enough (can I have a light?) everyone will be expected to act that way," Hayek would respond that this works just fine in a situation where you can actually see all the needs. If, however, you want a system in which people all over the world can benefit from the vast human potential that exists scattered among people who have no way of knowing anything about one another, the only system that we know of is that of exchange.

Hayek said that the one contribution he made to the science of economics was to point out how the price system worked as an abstract signal to regulate extended cooperation. If the price system had been intentionally designed for that purpose, he said, it would have been the most astonishingly brilliant achievement of mankind. As history shows, the real story is not so pretty, but the end result is still worth keeping.

That's not to say that the current understanding of debt and money must remain constant. Indeed, we never would have advanced as far as we have without changes in our cultural norms. In a world where so much debt is sovereign debt, I think it's worth taking seriously the idea of debt forgiveness, and what a fresh start could mean for the global economy. We're playing a dangerous game. Libertarians ought to take this very seriously: we can't pretend to live in a world where "property rights" are a fixed concept, and we need to understand the relationship between debt and coercion.

Since I find what he says so profound, I'll let Graeber have the last word on this:

Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.

Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.

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I am a Christian who thinks that love is what the world needs. I am a mathematician who thinks that truth is worth seeking passionately. I like to read about current issues, like religion (and its relation to modern science), economics, education, abortion, and war. I don't have it all figured out, but writing about it helps me clarify my own thoughts. Socrates is one of my heroes.